December 5, 2023

DealBook: For a Galleon Ex-Manager, Questions of Motivation

Twice last year, Adam Smith, a former portfolio manager at the Galleon Group hedge fund, met with lawyers for its co-founder, Raj Rajaratnam, who had been charged with netting tens of millions through insider trading.

On Thursday, Mr. Smith’s interviews with the defense lawyers were the focus of Mr. Rajaratnam’s trial.

Earlier this week, Mr. Smith, a cooperating witness who faces up to 25 years in prison after pleading guilty to insider trading, told jurors he routinely traded shares of technology companies based on inside data. In most cases, he said, “I shared it with Raj.”

The Galleon networkAzam Ahmed and Guilbert Gates/The New York Times Click on the above graphic to get a visual overview of the Galleon information network.

But in a heated exchange on Thursday, defense attorney Terence J. Lynam confronted Mr. Smith, claiming he did not tell Mr. Rajaratnam’s defense team, when they had interviewed him in February and July of 2010, anything about the insider trading offenses that Mr. Smith later said he had committed.

“I was only answering the specific questions,” Mr. Smith said. “I wasn’t volunteering any information.”

“You said you didn’t know of any insider information, right?” Mr. Lynam said, raising his voice.

“I wasn’t asked about any insider information,” Mr. Smith responded.

The implication, according to the defense, was that Mr. Smith divulged to the federal government that he had participated in an insider trading scheme only to try lessen his sentence.

During his testimony earlier this week, Mr. Smith walked the jury through a number of times when, he said, he obtained nonpublic information for himself and his boss, Mr. Rajaratnam.

Andrew Michaelson, a prosecutor, reminded jurors of e-mails sent from Mr. Smith to Mr. Rajaratnam about Integrated Device Technology’s planned acquisition of Integrated Circuit Systems in 2005. The tips came from a Morgan Stanley investment banker, Kamal Ahmed.

The subject line in those e-mails was “The two eyes,” a code that used the first initials of both companies. In each, he relayed tips about the deal’s progress. One read: “I had a chance to update and we are still on track.” A later e-mail had the subject line “Eyes” and said, “Game on.”

Mr. Lynam tried to show that the information Mr. Smith said he shared with Mr. Rajaratnam was already the subject of market speculation and therefore already public — for instance, the 2006 acquisition of A.T.I. by Advanced Micro Devices.

The defense showed an e-mail alert sent to Mr. Smith from a technology news service called ChinaByte. Citing a source, the e-mail said a deal had been reached for A.M.D. to acquire A.T.I.

“It’s true, there were a number of rumors, yes,” Mr. Smith said.

But Mr. Lynam also tried to establish the point that Mr. Smith’s own analysis gave him reason enough to trade in the company.

He pointed to e-mails from Mr. Smith to others in the Galleon Group, including Mr. Rajaratnam, in which he talked about A.T.I.’s fundamental value, often forwarding an analyst’s research.

Mr. Lynam said that with the research and Mr. Smith’s own glowing reviews, there was ample reason to buy A.T.I. without any insider information.

“Yes, but they also don’t mean I didn’t have insider information,” Mr. Smith replied.

The defense tried to distance Mr. Smith’s trades from Mr. Rajaratnam’s, focusing in part on the company Intersil. Mr. Smith testified earlier this week that he had a source in Taiwan who had leaked him the company’s quarterly earnings before they were publicly announced.

In early 2009, for instance, just before the company reported earnings, Mr. Rajaratnam did not trade any shares in the company for more than a month.

“You claimed that you told Mr. Rajaratnam inside information about Intersil’s earnings, but he’s not even trading in the period up to this?” Mr. Lynam asked.

“That’s true, in this case,” Mr. Smith replied.

Prosecutors, however, offered their own trading examples.

Twice in 2004, during a particularly rough patch for the Intersil, the company said that their earnings would fall below expectations. Mr. Smith’s said in testimony earlier in the week that a source at the company, Jason Lin, tipped him to the bad news. Mr. Smith, in turn, shared that information with Mr. Rajaratnam.

In the days before the second announcement on Oct. 6, 2004, Mr. Rajaratnam placed a negative bet on the company, shorting 125,000 shares, according to the slides presented by prosecutors.

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